Relative Performance Evaluation and Corporate Discretionary Disclosure

Abstract

According to the unraveling result, an informed party ends up revealing all the private information to uninformed parties without being able to exploit information advantage despite its discretion to disclose the information (Grossman and Hart, 1980; Grossman, 1981; Milgrom, 1981; Milgrom and Roberts, 1986). In contrast, this paper shows that strategic delegation of disclosure decision coupled with relative performance evaluation (RPE) enables a firm to withhold private information by serving as a credible commitment to withhold information. The use of RPE naturally makes a manager focus on the difference between his own firm's performance and a peer firm's performance. Then, to maximize the difference, the manager does not want to share market demand information with a rival firm. The selfish but rational withholding of information decreases a firm's profit ex post under low demand when a market needs coordination between two firms' productions. But the consistent ex post withholding of information allows a firm to sustain withholding information in equilibrium and a firm's expected profit improves under the equilibrium.